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Why All Signs Point to a Hot Housing Market

A variety of macroeconomic trends are coming together in favor of companies tied to the housing market.

In this segment from the Motley Fool Money podcast, the cast takes a peek in the windows of the housing market, and they like what they see: homebuilder D.R. Horton (NYSE:DHI), tool giant Stanley Black & Decker (NYSE:SWK), and paint supplier Sherwin-Williams(NYSE:SHW) gave us great quarterly reports late last week. Meanwhile, existing home sales in March hit their highest level in a decade. But those are not the only reasons to like this sector right now.

A full transcript follows the video.

This video was recorded on April 21, 2017.

Chris Hill: We begin with all things related to housing. Home builder D. R. Horton putting up nice profits in the first quarter this week, Stanley Black & Decker's first quarter profits more than doubled, and Sherwin-Williams' second quarter results pushed the stock to a new all-time high. Matty, we have all these things in and around the housing market, and I don't know, I look at these results and I just think, I don't really have any exposure to housing in my portfolio, and maybe it's time I start looking there.

Matt Argersinger: You might want to. You didn't even mention that sales of existing homes in March hit the highest level in a decade. Lots of macro numbers out there, but I wanted to actually focus on some businesses. I think this can partly explain what's going on in the housing market. Amazon, which we all know, almost $80 billion in North American online sales. Facebook, 1.2 billion daily users. Netflix, probably going to crack 100 million subscribers this weekend, many of whom, for some strange reason, are going to watch a lot of Adam Sandler, which I don't know about.

Hill: We'll get to that.

Argersinger: Then, Activision Blizzard, which we all know, biggest video game publisher, players spend 40 billion hours playing Activision games last year, three billion hours watching other people play Activision video games. And, here's one more data point, somewhere, according to the U.S. Census, 20% to 25% of employees around the country telework at least part of the time. Where am I going with this? People are shopping online, entertaining themselves at home, spending hours and hours interacting on Facebook,Snapchat, Tinder, increasingly working from home. So, I feel like, where is all the investing going? What are they not doing? They're not going and getting a new car, driving to a restaurant or to the mall to go shopping. I feel like that, in a way, is something that's been happening for a very long time. Now, I think, we're finally seeing the implications in the markets and in business, and it's an astounding trend.

David Kretzmann: Yeah, last year was the first year where millennials, people between the ages of 18 and 34, became the largest demographic in the U.S., topping baby boomers. At some point, those millennials will move out of their parents' basement, they'll want to buy their --

Hill: Well, you did.

Kretzmann: I finally did. I made that leap a couple years ago. But I think that's a long-term tailwind behind the housing market, because at some point, those millennials will look to move into their own house, or potentially build their own house. And on that note, U.S. housing starts, or, the construction of new homes is still a good amount below the historical averages. So, there is still room for that tailwind to continue.

Argersinger: And also, what are those millennials going to do? I think more than any other generation, they're going to spend a lot more time at home than any other generation. So, that's where they're investing their time, and all that is going to be spent.

Jason Moser: Yeah. Housing is in great shape. I personally would like to go ahead and take credit for the lion's share of that activity in the first quarter of this year. You're welcome, America. Chris, I think you probably have more exposure to housing than you give yourself credit for as a homeowner. You have a lot of equity in your home, right?! So, there's your exposure. And that really is one of the benefits to being a homeowner, getting that equity, getting the opportunity to do more with that as time goes on, because that equity ultimately results in new ways to finance things that may come up in your life. You have a child who's getting ready to go to college, there's going to be a lot of big bills coming your way, Chris, so you may want to look at refinancing. Who's going to play a big part in that refinancing? One of our favorite businesses, Ellie Mae, which is another way to play into that housing market. And we've talked a lot about Sherwin-Williams, another phenomenal quarter. This is a business where the paint stores group is responsible for most of the company's revenue, about 70% of the revenue. This domestically is about a $12 billion industry, and Sherwin-Williams owns more than half of that market share all together. So, I think you posed a very good question before taping -- what exactly is going to disrupt paint in the coming years? It's a bit tongue in cheek, but I don't know what does, Sherwin-Williams is in a really good position.

Hill: 25 years from now, aren't we going to be painting our houses and apartments the way that we're doing it right now? I just don't see that changing in any big way.

Argersinger: Unless we have pixelated wallpaper, wallpaper screen.

Moser: Sherwin-Williams is in a great position with that because of the presence, because of the portfolio of offerings. It's more than just Sherwin-Williams, they're able to pass through production costs pretty reasonably without too much interruption of the business, because they priced their product there. It's not the high-end offering like a Benjamin Moore. And they're getting ready to close this Valspar deal, which is only going to make this company bigger. I think when you look at a business like Sherwin-Williams, we had it on the watch list in MDP for a while, the biggest problem was we could never get it to where the price actually made sense. And I understand why, the market gives this thing a lot of credit because it deserves it.

Argersinger: Yeah, I just think, standing back, what we've seen with retail sales this past holiday season, we continue to see it, I think that's a big trend. And we know for a fact based on statistics that we are over-retailed in the U.S. anyway. So, maybe naturally, that's coming down anyway. But I think that's a big trend to watch out for.